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Lesson 5: How to Place a Trade

How to Place a Trade

How to Place a TradeWe started to see the first elements of a currency pair (what is a pip). In this article, we will see how to place a trade. "Opening a position" or "place a trade" is undoubtedly one of the expressions that we will encounter more often dealing with Forex.

Whoever opens a position, in practice, places a purchase or sale order for a given currency pair: in other words, he buys or sells a certain amount of currency and then renegotiates it at the best possible price at a later date.

For example, if you buy USD/EUR, it means you buy Dollars against the Euros, and the profit or loss will come from the evolution of the Dollar/Euro exchange rate. Of course, closing a position means doing the opposite action, and so, selling USD/EUR. In this case, you buy Euros against Dollars.

When you close a position, you are no longer in the market (unless you have other open positions at the same time, which is not forbidden: in short, it is not said that closing a position means that you are forced to close all the others as well).

A fundamental concept is that when we buy a currency pair, we buy the base currency and sell the quote currency. Conversely, when we sell a currency pair, we buy the quote currency and sell the base currency.

 

What does "long and short" mean?

"Go long" or "go short" we have seen, are two other expressions that are commonly used in Forex. In particular, "go long" (or "open a long position") means buying the currency pair, and then opening a buying position. While "go short" (or "opening a short position") means selling the currency pair, and then open a selling position.

It follows that the long position is bullish, as opposed to that short, which is bearish. These terms are used for the simple reason that in the Forex market the terms "sell" and "buy" may give rise to some confusion: in fact, when we buy a currency, we sell another at the same time ( and vice-versa). If you buy USD/EUR, for example, you buy American Dollars (representing the base currency) and sell Euros (which represent the quote currency).

 

Bid, Ask, Spread

The bid and ask are, respectively, the selling price and the buying price of the currency pair. The difference between the bid and ask is called spread.

The bid is nothing more than the price at which a broker is willing to buy the currency pair, that is, the price at which the trader can sell the base currency in order to buy the quote currency. The ask is nothing more than the price at which a broker is willing to sell the currency pair, that is, the price at which the trader can buy the base currency in order to sell the quote currency.

As mentioned, the spread is the difference between the bid and ask in relation to the currency pair that is the subject of exchange. It is the gain that gets the broker.

The cost of the spread is charged for each operation once, usually at the time of buying. The spread can, therefore, be considered as the difference between the bid and ask, but also as the broker's compensation: the magnitude of each spread changes, hence, according to the broker with which we make trading, as well as depending on the currency pair.

For example, a currency pair that is characterised by a reduced volume and hence for poor liquidity may have a wider spread than another currency pair with a larger volume.

 

Types of order

In Forex, and in trading in general, there are different types of order depending on the trader's needs. Let's see the main and most used types of order.

Market Order is the type of order that a trader uses when wishes to buy or sell a currency pair immediately, at best available current market price. With the Market Order, the execution of the order is guaranteed (provided enough depth is available), but the price may vary.

Stop Order is an instruction to trade when the price of a market reaches a particular level that is less favourable than the current price. So this means buying if the market hits a specified higher price, or selling if it hits a specified lower price.

Limit Order is an instruction to trade if the price of a market reaches a particular level that is more favourable than the current price. The limit order level is the maximum price at which you are willing to buy or the minimum price at which you have decided to sell a currency pair.

Both for the Stop Order and the Limit Order, the trader have to specify the buy/sell price, and also the amount of time this order must remain active, which may be GFD (Good For Day), GTC (Good Till Cancelled) or GTD (Good Till Date).

OCO Order is the acronym of One Cancel Other and allows you to place a pair of orders stipulating that if one order is executed fully or partially, then the other is automatically cancelled. An OCO order combines a stop order with a limit order.

 

What are stop loss and take profit?

Stop loss and take profit are two orders that can be exploited when we do trading for monitoring an open position. So, it is possible to determine the marginal rates with which to exit from a trade in loss ("stop loss" means, in effect, "stop of the loss") or from a trade in gain ("take profit" means, clearly, "taking at home the profit").

After we have set these orders, the trade closes automatically when one of the two levels is reached: this is a useful and convenient tool because it prevents us from being connected to the internet to see whether or not the conditions set out are fulfilled.

To be more explicit, we use the stop loss when we want to close a trade that is not guaranteeing good results and, therefore, to contain the losses, while we use the take profit when we want to close a trade that has got the gain we expected.

 

Click and go!

Once we have decided how much to invest in the trade, all that remains to do is to press, in the platform, on "Buy" for going long or "Sell" for going short and your operation is open.

In the next article, you will see some important Forex aspects.

 

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